Hello, i tried to research this on google but couldnt find much help, was hoping the experts here can explain this to me. StockA price: $42 Nov 50 Call: $0.3 If i naked sell 100 contracts to pocket a premium of ( 0.3 * 100 * 100 ) $3000. I understand that on Nov expiration date if StockA is below or equal to $50, i keep all $3000 and call expires worthless. If StockA is above $50, the call option will get exercised and I will have to buy the stock at market price to cover the $50 call. Now the confusion i have is with the margin requirements associated, how exactly will the margin work in this case? i have a normal brokerage account. 1) What is the margin requirement? is it just the amount of cash i need to have in my brokerage account to cover the short position i have? 1) At the time i sold the 100 contract of naked call for $0.3 premium. What is my margin requirement? 2) What if the underlying StockA goes from $42 to $49, will my margin requirement go up? 3) What if i dont have the required cash in my account to cover the margin requirement in the above example 2) ? Sorry i know those seem basic questions, but i really couldnt find a straight answer from anywhere. Thank you for your help!
Please don't do that. You are looking at such a huge potential loss if you don't hedge. 100 contracts? With think or swim these are the margin requirements for uncovered calls: The greatest of: 100% of the option proceeds plus 20% of the underlying stock less any amount the option is out-of-the-money; or 100% of the option proceeds plus 10% of the value of the strike price; or 100% of the option proceeds plus $50 per option contract If you do that you are looking at huge downside potential if the stock moves against you. I would consider looking into hedges if you are going to do something along these lines because you will drastically reduce your downside. To answer #3, as long as you aren't called your margin requirement shouldn't go up but you have to look at the margin requirements I gave you (if you are going to use thinkorswim as a brokerage). If you don't have the required cash in your account to cover the calls you will have securities liquidated for you. If that doesn't fix it you will have to settle your account within a period of time.
Sell Nov 47.50 Buy Nov 50 Max loss is 2.50 minus credit. Max profit is probably higher than going naked with the Nov 50 and much safer.
[StockA price: $42 Nov 50 Call: $0.30 1) Margin requirement is $450 per call (option premium can be applied to the initial margin requirement so margin call is $420) 2) If underlying goes from $42 to $49, your margin requirement increases to $910 ($880) 3) If you dont have the required cash in your account to cover the margin requirement, you're not going to be able to place the trade, And if it goes through by mistake, they'll close it down as soon as it's recognized, regardless of what the prices are - and for an extra bonus, they'll restrict your account. FWIW, don't do this unless you are under the supervision of an adult
lol thanks guys! that cleared things up quite a bit. I had a feeling it's very risky. Btw the stock i was looking at is hsy, it's been flat around 42-44 for a while and doesnt likely to move above 45 by nov expiration. So my logic was to naked selling the nov 50 call, it seemed like free cash! But the margin requirement made it impossible. One last question, if the stock moves from 42 to 49, why does the brokerage care and require increased margin to cover it. I mean it will still expire worthless below $50 Shouldnt it be only after it moves above $50 (when you start to lose money), then they would require additional margin?
That .30 option could easily be worth $2.00 or more if the stock jumps to 49 fast enough and the stock could then fly past 50 by expiration. A $10 move does happen and you have to buy those options back to close the position. I recommend a credit spread like in my first post. It would be nice to know the stock you have in mind, you would get more detailed advice.
Margin requirement is set forth under Reg T by the FRB. For naked options, it's purpose is to require more margin as a position gets closer to the money. The nearer an OTM option gets to the strike, the greater the risk of loss. A margin requirement protects you and the broker by limiting the amount of naked leverage that you can exert. Isn't 5:1 enough (an approximate guesstimation) ?